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Wednesday, March 12, 2014

No Dealers Wild About Tesla Sales Bid

A monster battle is being waged this very minute across the United States, and you're probably completely unaware of it.

This monster battle is pitting hundreds of millionaires against one very powerful billionaire, and some experts say the future of how a legacy industry operates hangs in the balance.

What is this monster battle? It's a state-by-state effort by Tesla Motors and it's founder, the charismatic Elton Musk, to sell their premium electric cars direct to the auto-buying public. Without using dealerships to do so.

So what, you ask? Those fancy Tesla cars start at $70,000, which automatically means the vast majority of us car purchasers are unaffected by whether or not Musk and his company must sell through dealers, or can sell directly to the public. Theirs is a niche market, so what makes this a "monster" battle?

Well, for starters, even though it's a brand-new brand, Tesla is having an easy time
making a name for itself in the marketplace. Tesla's sedan model, cleverly
called the "Model S," is the top-scoring car for 2014 by highly-respected Consumer Reports. Their stunned editors gush that the Tesla Model S "is the electric car that shatters every myth" about the category. It's the car luxury buyers, car enthusiasts in general, and environmentalists are raving about. And when was the last time those three disparate groups found anything to agree on?

So think about it: if Tesla can build a successful business model by selling its sought-after products directly to consumers, without dealers acting as middlemen in the transaction, what's to stop every other car manufacturer from doing the same thing?

For approximately 75 years, the same car-selling business model has been in place across the country. Automobile manufacturers are required by law to sell their products to dealers, who then sell that product to consumers. Ostensibly, this arrangement has something to do with consumer protection rules, but hardly anybody would suspect car dealers and manufacturers of being so magnanimous, abiding by an arrangement that didn't benefit them first and foremost. Over the years, this arrangement has been hard-wired into the vehicle sales business by an automotive industry looking to extrapolate as much profit from as many different parts of the vehicle production process as possible. This means that in all 50 states, it's illegal for General Motors to directly sell you any car they make. And it's illegal for your local Chevrolet dealer to start up a factory and make a car to sell you.

To hear auto dealers tell it, this current model is good for consumers, because it puts local faces with the expensive proposition of purchasing a big-ticket item, plus local mechanics, local parts dealers, and - most importantly - local dealership jobs right in the communities where car buyers live. Dealers say that they can provide a level of service and responsiveness that a national corporation cannot. They hire within the community, and spend lots of money sponsoring local youth sports leagues and other community charities. They want us to think such altruism is some grand benevolence on their part, although we all know it's just clever marketing. But it works, doesn't it?

Of course, along with that supposedly higher-quality service comes higher prices, to pay for the additional layer of administration between the origin of the product, and the end consumer. And it doesn't take into account today's reality of national dealer corporations, in which sprawling multi-state companies own dozens of "local" dealerships, such as AutoNation, with 225 dealerships across the country; Penske, with 191 dealerships; and Lithia, with 98 dealerships. How "local" are these dealerships, really, when they have no local control over a business that's managed as simply a division of a larger organization? Maybe not as large an organization as General Motors, Ford, or Chrysler, but still hardly a pious Mom-and-Pop outfit struggling to build long-term rapport with their neighbors.

Despite its merits and drawbacks, this sales arrangement may have met its match in Elton Musk, and his Tesla Motors car company. Musk has a business savvy of his own, having co-founded PayPal, the ubiquitous Internet payment system. Plus, he practically invented the luxury electric car concept, for which Tesla represents a stunning achievement in terms of bring something so radical to market. Up until Tesla, electric cars were aerodynamic and expensive, but hardly sexy and luxurious. Yet Musk has fashioned himself as the Steve Jobs of the automotive world, bringing design and allure to a segment of the car business that had mostly been the domain of pragmatic scientists and liberal environmentalists.

Of course, the carbon footprint created by all of the energy it takes to power electric cars makes them no more environmentally-responsible than conventional gas-powered vehicles.* But in this particular conversation, that's beside the point. Other manufacturers are going to sell more electric cars than Tesla will, but it's the quality of the product Musk has created, and how he wants to sell his cars that is angering traditional auto industry players across the country.

First, they're angry that it took a non-car guy to engage luxury car consumers with the notion that going electric makes sense, especially when going electric looks as beautiful and feels as leathery as his Teslas do. Musk's is a feat conventional automakers apparently never tried, or even considered, by the way they're waging an all-out war against him. GM, in particular, seems especially worried that their luxury brands won't be able to compete against Musk, despite the price points involved. And GM is probably correct: all it's got in the luxury department are the venerable Cadillac and Buick brands, which while experiencing some renewed popularity of late, still aren't nearly as provocative as the indisputably trendy Tesla.

With its rock-solid reputation for craftsmanship and reliability, Toyota's Lexus brand is probably pretty safe, despite Tesla's allure, which remains relatively untested. Ford and Chrysler don't have anything that can directly compete with Tesla, while Mercedes, BMW, and Audi have relied on their prestige legacies for so long, it's probably beneath them to publicly worry about Tesla's impact on their bottom lines.

But behind the scenes, all automakers are likely freaking out as they contemplate the new sales world in which Tesla is insisting they compete. And it's a new world that car dealers, even more than manufacturers, find perilous to their way of life. For manufacturers, it's a new world in which dealerships provide no buffer between the car-buying public and themselves. Especially when it comes to all of that pesky warranty work, after their engineering and manufacturing departments get something wrong. Making dealerships handle all that stuff is a good way to bury its associated costs - and bad PR - from investors and future customers.

For dealers, it's basically a new world in which they're not longer needed. Unless they can figure out a way to join the corporation making the cars they're selling, so they can turn around and act as the local selling office for manufacturers. In other words, your Chevrolet dealer would shut down it's own status as a business, and become the sales agent for General Motors' Chevrolet division. It would mean less profits for the people who owned the dealership, but it likely wouldn't impact overall employment numbers, since Chevrolet would still need the same employees to sell and service their products.

But why upend what works? That's what manufacturers and dealerships are asking. And they're forcing states to deny Tesla permission to change the world as they know it. Yesterday, they convinced the New Jersey Motor Vehicle Commission to ban direct sales of vehicles in the state. Although the state's decision applies to any car, it was a direct response to Tesla's challenge, and it denies Musk a key opportunity to sell his high-priced cars in one of the wealthiest parts of the country.

At least, it denies Musk a key opportunity to sell his cars his way. He's more than welcome to sell his Teslas through dealers, and there are likely many dealers drooling at the chance to do so.

For its part, New Jersey joins Arizona and Texas as states where Tesla has been officially banned from selling cars directly to the public. And more states will likely follow suit, as the powerful, wealthy, and influential political lobby of franchised auto dealers - not to mention the manufacturers whose cars they're selling - applies pressure to their local representatives. Musk may be a billionaire, but these dealers aren't poor, and there are more of them. We still live in an approximation of a democracy, remember. And these dealers have been playing the game longer than Musk has.

For his part, Musk says he needs to save the money that would otherwise go to dealers, because creating electric vehicles is inherently risky, costly, and unpredictable. It's too early to create a dealer network when the technology for electric cars is still in its infancy. Plus, he says he needs to educate customers on what to expect from electric cars, and how to operate them. Why such an educational process can't be conducted through a dealer network isn't clear, but apparently, Musk wants his engineers to be closer to the process than they likely otherwise would be with a layer of dealerships between Tesla's entrepreneurial mojo and the car buying public.

Maybe Musk is right. It does seem silly for a government to forbid a company from directly selling its own products. Plus, it's unlikely that many car buyers today would mourn the loss of conventional dealerships in their quest for something so new and unique as a luxury electric vehicle. But the war between Musk and America's car dealerships is bigger than Tesla. If Musk gets his way, then all car manufacturers will be able to ditch their current dealer networks, and sell their cars directly to the public, just like Tesla. And most dealerships know they truly add little value to the car buying - and car owning - experience.

I have a friend who's the general manager of a successful car dealership in Dallas, and I know he's one of the good guys in America's dealership network. But how many good, honest car dealers are out there? America's car dealership associations don't really want us to find out.

Which is probably reason enough for us to hope Musk can pull out some wins in his quest for Tesla. Just don't count on seeing much in the way of savings if his new model becomes legal.

In all this warring over whether manufacturers need dealerships to sell their cars, nobody yet has promised the consumer any sticker shock relief.
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* Update 3/14/14:Want proof? How about this article about how electric car batteries are contributing to pollution in China, where they're made.